501(c)(3) Tax Compliance Checklist: Avoiding Common Pitfalls in Nonprofit Accounting
Running a 501(c)(3) nonprofit means more than advancing your mission—it also means navigating IRS rules, financial reporting, and compliance standards that aren’t always straightforward.
The smallest mistake—like a missed Form 990 deadline or undocumented donation—can put your tax-exempt status at risk. That’s why we’ve put together this simple, practical 501(c)(3) tax compliance checklist to help your organization stay in good standing and focus on what really matters: your impact.
1. File the Right Version of Form 990—On Time
Every tax-exempt nonprofit must file an annual return. Which form you file depends on your gross receipts:
- Form 990-N (e-Postcard) – for orgs with revenue under $50,000
- Form 990-EZ – for revenue between $50,000 and $200,000
- Form 990 – for revenue over $200,000 or assets over $500,000
Missing your filing three years in a row will automatically revoke your tax-exempt status—no warnings.
Need help navigating your 990? Our nonprofit accounting team can file the right form and ensure full compliance with IRS deadlines.
2. Document All Donations and Acknowledgments
When donors give $250 or more, the IRS requires your nonprofit to send a written acknowledgment. It should include:
- The donation amount or item description
- A statement that no goods/services were provided (or the value, if they were)
- Your nonprofit’s tax-exempt status
You’ll also need to issue Form 8283 for non-cash donations over $500 and Form 8282 if you dispose of donated property within three years. Keeping your bookkeeping up-to-date when working with multiple donors or recurring gifts is critical to help you stay organized and audit-ready.
3. Avoid Private Benefit and Excess Compensation Issues
One of the most common pitfalls we see is excess benefit transactions—when insiders (board members, executives, or founders) receive unreasonable compensation or perks.
To stay compliant:
- Set reasonable, documented salaries
- Avoid lending money to insiders
- Keep board meeting minutes detailing compensation decisions
If this isn’t handled properly, the IRS can impose penalties or revoke your tax-exempt status completely. That’s where working with a nonprofit-savvy CPA really matters.
4. Maintain Public Support Status
Most 501(c)(3) nonprofits must pass the public support test—which shows you receive a majority of your income from the public (grants, donations, etc.), not just a few big sources.
Failing to meet this test for two consecutive years can trigger a reclassification as a private foundation, which brings stricter rules and reporting.
We help nonprofits across Central Ohio analyze their support ratios annually and plan grant or donor campaigns accordingly.
5. Track Restricted vs. Unrestricted Funds
It’s not enough to track income—you also need to distinguish between:
- Unrestricted funds – can be used for general operations
- Temporarily restricted funds – tied to a specific project or timeframe
- Permanently restricted funds – endowments and gifts that must remain invested
Using restricted funds incorrectly can damage donor trust and even lead to legal issues. A strong accounting system can prevent misallocations before they happen. Our Columbus-based CPAs can help you build or clean up your chart of accounts.
Final Thoughts: A Strong Mission Deserves Strong Accounting
Nonprofits work hard to make an impact—but without strong financial compliance, even the most noble mission can run into trouble. Whether you’re applying for grants, preparing for an audit, or just trying to keep your tax-exempt status intact, having a CPA who understands nonprofit rules is essential.
At Hogan CPA, we partner with 501(c)(3) organizations throughout Central Ohio to simplify compliance and strengthen financial stewardship—so your team can focus on serving the community.
Need help with Form 990, board compensation policies, or donor reporting?
Contact Hogan CPA to schedule a consultation with our nonprofit accounting experts.